FSDH
Research’s analysis shows that mutual fund investment can create wealth for
investors and that funds pooled together can be used to finance critical
infrastructure and expand business operations.

Investors
in mutual funds do not necessarily need to have expert knowledge about
investment management to enable them to create wealth, as there are investment
management experts whose primary role is to grow the value of investments under
their management.

Money
that is pooled together through mutual funds can be channelled to address
critical infrastructure either directly or indirectly. This would promote the
competitiveness of the economy, enabling businesses to expand operations and
employ more people, and would assist government at all levels in generating
more tax revenue. FSDH Research warns, however, that mutual funds need more
support than is currently available to enable potential investors to fulfil
their wealth creation and developmental roles.

A
mutual fund is a pool of funds brought together by a professional fund manager
from several investors to invest in selected underlying securities. The
underlying securities can be one or a combination of the following: stocks,
fixed income securities, real estate, and commodities. A mutual fund portfolio
is structured and maintained to match different investment objectives. The type
of mutual fund an individual invests in depends on their financial objectives
and appetite for risk. Most mutual funds are open-ended investment schemes.

This
means that the fund manager can create additional units for new investors on
demand. The fund manager is also able to provide active liquidity by redeeming
units from existing investors who want to sell units for cash. Through this
pool of funds, an investor creates wealth over a long period of time by making
the money work for him through regular saving and investment.

In
addition to liquidity, mutual funds offer a range of benefits to investors
including portfolio diversification and lower transaction costs. The existence
of a Trustee and Custodian to a mutual fund ensures the safety of investments,
as the Trustee ensures that the fund is managed in line with approved
investment guidelines, and the Custodian holds the fund assets. Mutual fund
investments are affordable for low-income investors, as some funds require an
initial investment of only N5,000.

The
mutual fund assets in Nigeria have grown significantly in the last five years.
This is an indication of the growing interest in this class of investment. Data
from the Securities and Exchange Commission (SEC) on the Net Asset Value (NAV)
of all registered mutual funds in Nigeria shows that the collective NAV grew by
349% between 01 November 2013 and 02 November 2018.

This
translates to a Compound Annual Growth Rate (CAGR) of 35% between the periods.
Despite the impressive growth rate, FSDH Research notes that there is
significant room for growth in mutual fund assets as we estimate the ratio of
mutual funds to the country’s Gross Domestic Product (GDP) at 0.51%.
Governments and corporates may access the required long-term funds to finance
critical infrastructure and business expansion through the growth of mutual
funds.

With
appropriate structures in place, mutual funds can also be used to revive the
real estate sector, which is currently in depression. As fund managers mobilise
funds and invest in Bond Funds, Real Estate Funds and Equity Funds, they are
providing long-term capital for developmental purposes. They also provide
short-term working capital through investment in Money Market Funds. The growth
in investable funds has positive multiplier effects on the economy.

However,
FSDH Research’s findings show that Government, regulators and the operators in
investment management need to give the mutual fund additional support.
Government could offer tax incentives to investors who are committed to a
regular investment plan in mutual funds. It should also create an enabling
environment that will lead to job creation in the country in order to increase
savings and investable funds.

Regulators
could promote innovative legislation to increase investment in mutual funds and
expand investment channels to increase returns on the funds invested. The Fund
Managers Association of Nigeria (FMAN) should continue to create public
awareness on the benefits of mutual funds in order to generate interest from
the investing public.